in the Macroeconomics: An Introduction, Alex M. Thomas offers a new overview of the development of macroeconomics and combines concepts with real examples from the Indian economy. By linking economic ideas to real problems, Thomas achieves his goal of helping readers understand everyday macroeconomics, writes Thomas Kaibalyapati Mishra.
Macroeconomics: An Introduction. Alex M. Thomas. Cambridge University Press. 2021
Macroeconomics: An introduction by Alex M. Thomas is an excellent attempt to engage its readers in the development and application of economics happening around them, framing headlines and shaping gossip at the table by combining concepts with specific reference to the Indian context. Drawing on the dimensions that scholars have long brought to the field of economic thought in both classical and modern textbooks, Thomas establishes economics as a discipline concerned with meeting the individual, historical, and political needs of the masses through education and Accumulation deals and wealth distribution.
The emergence of economics goes back to the time of Ibn Khaldun, Kautilya and Confucius, unraveled with its modern existence as a discipline of political economy The Wealth of Nations by Adam Smith. Economics, a field with multidisciplinary relevance, demonstrated its political implications and governmental role through works such as General theory of employment, interest and money by John Maynard Keynes while continuing to touch on the various contours of classical economics presented by scholars such as Thomas Malthus, JS Mill, Alfred Marshall and others.
After the Age of Discovery in the 18th century, the most important developments in economics in the 20th century were monetarism, institutionalism and game theory. Thomas also highlights Piero Sraffa’s critiques of marginalist economic principles and the textbook culture of economics spawned by Paul Samuelson, regarding these as major developments that have spawned several new chapters in economics and its popular dissemination.
The two partly divergent strands of political economy related to levels of output and employment have been termed the marginalist school and the Keynesian school. Borrowing from the thoughts of JB. To say, Marshall and Arthur Pigou, the former school focused on the marginal productivity theory of income distribution, while the latter drew on the work of Michał Kalecki and Keynes. Although both schools studied the competitive economy assuming a certain level of productivity, the differences were many. The Keynesian explanation of output and employment was demand-side based, while the supply side dominated the marginalist school, which believed that “supply creates its own demand”.
Given the dynamic macroeconomics, in which investment plays the dual role of being a component of demand (aggregate demand) and a complement of productive capacity, the book classifies theories of economic growth into clusters of supply-side and demand-side theories. The supply side, with the aggregate production function as the workhorse, gained prominence as the basis of the economic growth models developed by Robert Solow and Sir Roy Harrod. The popular neoclassical theories of Paul Romer then developed technology as an internal component of economic growth. On the other hand, by bringing together classical and Keynesian versions of values, Pierangelo Garegnani developed the basic synthesis of demand-side growth theories.
Thomas demonstrates the need for clarity when modeling economic problems. The book argues that, in addition to logical constraints, mathematics also brings clarity to economic models. For example, calculus (a workhorse of the mathematical underpinnings of marginalist economics) contributes to the potential change in several economic values, including costs, revenues, and productivity. The importance of an appropriate and reasonable number of variables is also evident, since strategies based on poorly fitted models with fewer variables than required can lead to inefficient results.
The opposing views of methodological individualism or holism (results derived from the observation of individuals or groups), supported by marginalist and Keynesian theories respectively, have raised the question of “right” and “wrong” theories. Here Thomas expressly subscribes to the holistic approach, like Keynes himself, who held that methodological individualism yields erroneous results in understanding macroeconomics.
While the book outlines economics as a science of wealth that presents a macro picture, Thomas identifies the embryonic beginnings of National Accounts Statistics (NAS) in the works of William Petty. The regulations of the System of National Accounts (SNA) mandated by the United Nations followed later. The Indianized version of the SNA, indigenized by Dadabhai Naoroji, VKRV Rao and PC Mahalanobis, still suffers from the neglect of women’s contributions and the ecological costs of wealth creation. The book also discusses the classification of different economic sectors and their relationships, as well as the sectoral flows of funds. This represents the ideas of interdependence and the circulation of wealth in economics.
The strength of this work compared to existing textbooks on macroeconomics lies in its real-world examples, both from India and from around the world. Rao, one of India’s leading economists, brought Keynesian theories back into the framework of development economics. Along with AK Dasgupta, he noted that the Keynesian framework still has limited applicability to India, given the supply-side constraints of inadequate physical and social infrastructure and discrimination in the labor market. Given the government’s current emphasis on self-sufficiency (Atmanirbhar), Thomas emphasizes the need for India to produce products at a lower cost than the rest of the world, thereby reducing dependency arising from export markets and bilateral trade agreements.
Thomas vividly outlines India’s growth trajectory in terms of historical inequalities, sectoral performance, job creation and environmental impacts. India’s distribution of land tenure exemplifies historical inequalities. The share of households with large landholdings is only 0.24 percent (compared to 75.42 percent of smallholders); However, the average land ownership of these households is 14.4 hectares (compared to 0.234 hectares for small-scale farming households). Once the backbone but now the lagging sector of India’s economy, agriculture makes a minimal contribution to total national output, being significantly outpaced by manufacturing, but of all services it still seems to dominate.
Thus, contextualizing the structural aspects of the Indian economy, Thomas argues that any discussion of Indian macroeconomics has two main segments: first, the importance of agriculture; and second, the existence of an informal sector. Unlike developed countries, Indian agriculture is characterized by the functionalities of village economies, which suffer immensely from spatial inequality and are rarely explained by economic theories. Societal restrictions related to caste, gender, and race affect the regional distribution of natural resources and land tenure—essentially all elements of policy formulation. The presence of informality also contributes to the precariousness of inequality in the village economy.
India’s GDP growth has been excellent; However, the sluggishness in job creation is reflected in modest job growth. The ecological standpoint of the country’s growth is observed by CO2 emissions and the carbon footprint of India, where there is huge inequality. Individuals and organizations that benefit most from these emissions pay the least, and the poor appear to bear the significant environmental burden.
The book rightly addresses the two main issues of employment and inflation in India as they top the agenda of national economic policy regulations. Divide the economic question of employment decisively into quality and quantity, Thomas points to the need to address both of these dimensions for a target of full employment. In addition, ordinary household chores, which are normally done by women, are not included in the national accounts as they are not yet classified as ‘work’. It was recently published Time Use Survey in India made a rudimentary attempt to include women’s labor in the National Income Account (NIA); however, there was no economic value to this work. In terms of quantity, it has been found that the labor force participation rate (LFPR) is influenced by social and cultural factors (such as caste, class, gender, etc.) and not just economic factors. Similarly, the quality of employment is critical given its huge non-monetary and psychological impact. This discussion shows that just looking at the unemployment rate is not enough to get the true picture.
The other mistake that every real economy tries to avoid is the inflationary tendency of prices. In India, wholesale and consumer price indices (WPI and CPI) are the indicators of inflation, which is characterized by irrational and unexpected price increases. The base year for such calculations is still 2011-12, which does not take into account all the significant changes that have occurred since that period. Additionally, those involved in calculating WPI and CPI need to revise their assigned weights and include more products for better representation. Although Thomas does not address the structural problems of such indices, he does highlight several general policy recommendations for dealing with unemployment and inflation.
The advantage this book has over several other excellent textbooks on macroeconomics (see e.g. Brian Snowdon and Howard R. Vane) lies in the linking of fundamental economic concepts with real issues. Thomas does justice to the terms and contexts that define everyday macroeconomics. Based on the words of the father of the Marginalist school, Adam Smith, this book shows that “individual ambition serves the common good” as Thomas achieves his goal of enabling readers to understand the day-to-day life of macroeconomics.
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About the reviewer
Kaibalyapati Mishra – Institute for Social and Economic Change
Kaibalyapati Mishra is a PhD research scholar at the Center for Economic Studies and Policy at the Institute for Social and Economic Change, Bangalore, India. My primary research interests are market design, information structures and behavioral economics. I can be reached at [email protected]